No Honor Among Multinationals When It Comes to Taxes

Indignation over Google's tax-avoidance practices lit up headlines last week, but the fact is that what many multinational corporations do to pare their taxes down to obscenely small amounts is perfectly legal. Public outrage isn't likely to sway corporations to adopt a tax-paying honor system -- but it would probably be easier to get countries to come together on climate change than on a global tax regime.

Google avoided about US$2 billion in worldwide income taxes in 2011 by shifting close to $10 billion in revenues into a Bermuda shell company, Bloomberg reported last week. The information was included in a regulatory filing made by a subsidiary in the Netherlands.

Bermuda, along with a handful of other locales, is notorious for providing offshore solutions to multinationals eager to structure cash flow operations to their greatest benefit. However, tax authorities increasingly are looking askance at these tactics -- especially as many governments continue to struggle with lackluster economic growth.

That is because such tactics seem grossly unfair when described in layperson terms, even though they are usually perfectly legal. Outrage is building, though, and some companies are starting to feel the heat.

Glare of the Spotlight

Starbucks, for example, recently agreed to pay more taxes in the United Kingdom after public fury exploded over news of its paltry tax bill, but that move is widely viewed as too little, too late -- and a PR stunt besides.

Other multinationals coming under scrutiny include Apple and Google, which recently were taken to task by Australia's tax authorities over their transfer pricing strategies. Transfer pricing refers to the price at which multinationals' various divisions deal with each other, for example selling raw materials or providing manufacturing operations.

Most nations require such pricing to be "arms length" -- that is, the price must be the same as what would be charged to a non-related company. Still, transfer pricing strategies figure prominently in most companies' tax flows.

From Maestros to Plain Vanilla

Some companies are maestros in
structuring their global taxes. Earlier this year, The New York Times picked apart Apple's global tax structure to uncover very unique -- but legal -- schemes to maximize profits. Some were so innovative that other companies copied them.

By contrast, what Google did with its Bermuda shell corporation is relatively straightforward for a global tax move. It used a legal off-shore tax shelter in a locale where there is no corporate income tax.

A Simple Answer? Not Likely

Establishing a simpler global tax regime for multinationals is a tall order. It would probably be easier to get countries to come together on standardized climate change policies.

One potential solution that has some justification would be to streamline the U.S. tax code, to prevent companies like Google from sheltering income abroad.

"The IRS can try and make things tough on Google, but that is just counterproductive and might motivate them to move their corporate headquarters away from the United States," he pointed out.

"Some $4-5 trillion of corporate profits [are] stashed away overseas," Levinrad continued. "If that money were allowed to come back to the U.S. on a tax-free or tax-advantaged basis, imagine the economic boost we would see."